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 / Second Quarter 2002 / Issue 27(originally published by Booz & Company)


Yellow-Light Leadership: How the World’s Best Companies Manage Uncertainty

About one-third of the companies in our study now say they were overexuberant during the 1990s — tending to hire too many people in good times, which now has forced them into repeated layoffs as times have gone bad. Capital One is an exception. As a matter of policy, Capital One restricts head-count growth precisely because it wants to avoid a roller-coaster ride of hirings and firings. It even makes its HR department do sophisticated financial analysis of the cost and benefits of each proposed new hire. Moreover, no one at any level can be hired who doesn’t pass a tough numerical reasoning test. That’s disciplined management by the numbers.

Yield on Yellow
Only a year ago we were extolling the virtues of the green-light leaders at Schwab, Cisco, Corning, and Enron. Although it would be useful to know precisely what went wrong at their companies in 2001, and why it went so wrong so fast, we’ve concluded that, like Tolstoy’s unhappy families, each of those companies fell from grace in its own way.

Yet we believe there was one common denominator: Each company believed it would continue to see only green lights on the road ahead and, therefore, had only to keep going in the same direction to stay on course.

Some leaders of those companies were guilty of a sin that afflicts many powerful people: hubris. They believed the press reports that they were avatars of leadership who had the “right” strategy and had created “best” business models. The clearest — and most tragic — example of this was the Enron Corporation’s Jeffrey K. Skilling, who, as recently as the spring of 2001, was telling the press, “We are on the side of angels.” But business performance is not determined by finding the eternal formula for success; it means getting up each morning and doing the hard, ever-changing managerial work of providing the goods and services customers are willing to pay for.

During this past year, companies facing financial trouble weren’t derailed by their competitors; instead, the derailment was caused by the failure of the leaders of troubled companies to identify their own weaknesses and to shore up vulnerable areas. In hindsight, leaders at Cisco, Schwab, and Corning now admit that a yellow light had been flashing for some time, and that signs of impending trouble were missed because of the euphoria that comes from growth (and great press).

The good news is that the afflictions at those companies were far from fatal, and all will survive (thanks to piles of cash, sound core businesses, and leaders who have proved themselves in good times, and now bad). The next leadership challenge they face will be a test of whether they have learned lessons from the current era of adversity, the way Intel, Frito-Lay, and IBM internalized lessons from their past crises. For leaders who wish to learn such lessons less painfully, we offer the words of the late David Packard, cofounder of HP: “You get the most satisfaction in trying something useful, and after that you must forget about it and do something else. You shouldn’t gloat about anything you’ve done, and you ought to keep going and try to find something better to do.”

That brings us to the last, most important question: If the prime characteristic of analytical leaders is the ability to tell what time it is, and then to act accordingly, aren’t we simply calling attention to conventional “situational leadership”? Not at all. Situational (or contingency) leaders adjust their styles, acting “tough” during bad times and “soft” when things are going well. The analytical leaders we have been observing are not engaged in such Machiavellian playacting or stylistic reinventions designed to manipulate followers.

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  1. Bruce A. Pasternack, “Leadership: Dreamers with Deadlines,” s+b, Fourth Quarter 2001 Click here.
  2. Gary Hamel, “What CEOs Can Learn from America,” Fortune, November 12, 2001 Click here.
  3. Jerry Useem, “What It Takes,” Fortune, November 12, 2001 Click here.
  4. James O’Toole, Leadership A to Z: A Guide for the Appropriately Ambitious (Jossey-Bass Inc., 1999)
  5. Alec Levenson, Leveraging Adversity for Strategic Advantage, Working Paper, March 2002, Center for Effective Organizations, Marshall School of Business, University of Southern California
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